Second Corporation or Keep It in the One You Have?
Starting a second venture and wondering whether it needs its own company. Work out what a second corporation actually costs to run, why it almost certainly will not cut your tax bill, and the reasons it can still be worth doing.
net cost or saving a year
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The Tax, Either Way
| Item | One Corporation | Two Corporations |
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What the Second Corporation Costs
| Item | Basis | Amount |
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Reasons That Are Not About Tax
| Reason | What It Gets You | Weight Here |
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Points That Decide This
What to Do Next
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Disclaimer: The small business deduction under section 125 of the Income Tax Act applies to active business income of a Canadian-controlled private corporation up to the business limit. Where corporations are associated with each other within the meaning of section 256, they must share a single business limit and file an agreement allocating it between them; failing to file the allocation can result in no business limit being allocated at all. Corporations are generally associated where one controls the other, where both are controlled by the same person or group of persons, and in a range of other circumstances involving related persons, cross-ownership and specified shareholdings, so two corporations owned by the same individual will ordinarily be associated. The business limit is also reduced by reference to taxable capital employed in Canada and by adjusted aggregate investment income, neither of which is modelled here. Income in excess of the allocated business limit is taxed at the general corporate rate. Whether the lifetime capital gains exemption is available on a future sale depends on the qualified small business corporation share tests, including asset composition tests measured over the twenty-four months preceding the sale, and no conclusion about a future sale should be drawn from this page. Separating activities into different corporations does not by itself guarantee that liabilities of one cannot reach the other, and questions of guarantees, common directors, intercorporate loans, shared assets and the circumstances in which a corporate structure may be disregarded should be discussed with a lawyer. Government fees and professional costs change and vary between providers, so all costs here are editable inputs that should be replaced with figures you have been quoted. This page is general information, not tax or legal advice.
The Thing Most People Get Wrong
The appeal of a second corporation is usually the idea of a second small business limit: two companies, two lots of income taxed at the low rate, half a million each rather than half a million between them.
It does not work that way. Corporations controlled by the same person are associated, and associated corporations share one business limit between them. Two companies, one limit, allocated between them by an agreement filed with the returns.
So for most owner-managers the tax answer is simply nil. The same total income, taxed at the same rates, split across two sets of accounts instead of one. The second corporation costs money to run and saves nothing, and that is the honest starting point for this decision.
When Corporations Are Associated
The rules are broad. One corporation controlling another, both controlled by the same person, both controlled by related persons with cross-ownership: all of these associate. A single individual owning all the shares of two companies is the clearest case there is.
People sometimes try to avoid association by putting the second company in a spouse’s or adult child’s name. That is a considerably bigger decision than it looks, because it means genuinely giving up control of the business. And where the arrangement is not what it appears, the association rules and the related-person tests are wide enough to catch most of it.
The allocation has to be filed. Associated corporations agree how the limit is divided and file that agreement with their returns. Failing to file can mean no business limit is allocated at all, which is a considerably worse outcome than a straightforward split.
The Reasons That Do Hold Up
None of this means a second corporation is a bad idea. It means the case for it is not a tax case.
| Reason | How Strong |
|---|---|
| Keeping a risky venture away from a profitable one | Usually the best reason |
| Selling one business without the other | Strong where a sale is realistic |
| Different partners in each business | Often unavoidable |
| Clean reporting for each activity | Achievable within one company too |
| Getting a second small business limit | Does not work if associated |
Liability Is the Serious One
If the new venture carries real risk, putting it in the same company as twenty years of accumulated value means one bad event can reach all of it. A separate corporation is the standard way to keep that from happening, and for a genuinely risky activity it is worth paying for.
But separation has to be real. Personal guarantees, shared assets, common bank accounts and loans between the companies all weaken it, and a structure that exists only on paper may not do what you expect when tested. That is a conversation with a lawyer rather than an accountant.
Selling One Without the Other
A buyer wants the business they are buying, not a company that also contains an unrelated activity. Where two businesses sit in one corporation and only one is being sold, the sale usually has to be structured as an asset sale or preceded by a reorganisation, both of which cost money and take time.
If a sale of either business is realistically on the cards, having them separate from the outset is considerably cheaper than separating them later under deal pressure.
Do not assume a second corporation delivers a second capital gains exemption. Whether shares qualify depends on asset composition tests measured over the period before a sale, and a company holding surplus cash or passive assets can fail them. That is a planning exercise in its own right, not an automatic consequence of having two companies.
The Cheaper Middle Ground
Before incorporating again, consider whether a division within the existing company does what you need. Separate bookkeeping classes, separate bank accounts and separate reporting give you clean numbers for each activity without a second set of filings.
That covers the reporting motive entirely. It does nothing for liability, and nothing for a future sale, which is why those two reasons are the ones worth paying for.
What This Calculator Does Not Cover
- The reduction of the business limit by taxable capital or by investment income
- Whether the exemption would be available on a future sale of either company
- Intercorporate dividends and moving money between the two
- Whether separation would actually hold up against a claim, which is a legal question
- Holding company structures, which answer a different question
- Losses in one business offsetting profit in the other, which one corporation allows and two do not
The right answer depends on why you are asking. Our consultation covers whether the corporations would be associated, what the structure costs over the years you plan to run it, and whether the reasons you have in mind are the ones a second company actually delivers.
Frequently Asked Questions
Common questions on running two corporations.
Related Calculators and Guides
More on structuring what you own.
Decide on the Right Reason, Not the Wrong One
Tell us what the new venture is, what it is likely to earn and why you are thinking about a separate company. We will tell you whether the two would be associated, what the structure costs over the years you plan to run it, and whether the reasons you have in mind are ones a second corporation actually delivers.